Budget Submission 2020-21 - December 2019 - Private Healthcare Australia

 
Budget Submission 2020-21 - December 2019 - Private Healthcare Australia
Budget Submission 2020-21

                                          December 2019

Contact:
Dr Rachel David – Chief Executive
(02) 6202 1000
rachel.david @pha.org.au

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    Private Healthcare Australia Budget Submission 2020
1 Foreword
If private health participation continues to decline to 30%, where it was in the late 1990s, we are
facing a 91% increase in current wait times and an additional $20 billion Australian Governments will
need to find to address this.

This is unacceptable. In an economy used to instant on-demand service, Australians will not tolerate
waiting months or years for health services.

We need to repeat the collaborative effort made with private hospitals, doctors, consumers and the
government we saw in the first round of private health sector reforms.

First, participation of younger people needs to be better incentivised to stabilise premiums for
everyone. Working middle-income families with young children are bearing a disproportionate share
of the cost of private health as they cross-subsidise a large, baby-boomer cohort, who at the average
age of 72 are claiming record numbers of procedures.

The rebate should be restored to 30% for this cohort. Providing subsidies to private health insurance
is the most cost-effective way for the Australian Government to support the growth in hospital and
health services over the coming decades.

Subsidies for private health insurance-funded services cost the Commonwealth Budget around
30 cents in the dollar. The alternative, providing more services in public hospitals, costs the
Commonwealth Budget 45 cents in the dollar.

In addition, the government should look at a possible fringe benefits tax exemption for private
health insurance premiums for people aged under 40.

Second, we need to address one of the key frustrations consumers have with private health
insurance and permit health funds to pay for health care out-of-hospital on a broad scale.

The rules confining health funds to hospital care were conceived in the 1970s, when health
technology and even diseases were different.

Today, we are predominantly funding the treatment of chronic diseases, many of which can be
safely managed by health professionals in the community or in patients’ homes.

Finally, we need to protect Australians from escalating premium costs caused by fraudulent and
wasteful claims. Our members are not rich, with an average taxable income of $50,000 per year.
They have the right to healthcare at a time of their choice, by a fully trained specialist responsible for
their care, and not be gouged.

Private heath is entwined with Medicare – they cannot be separated. Private heath is the canary in
the coal mine – the pressures on private health will inevitably put pressure on Medicare.

There are challenges, they are fixable, and it’s time for action.

Dr Rachel David
CEO, Private Healthcare Australia

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         Private Healthcare Australia Budget Submission 2020
CONTENTS
1 Foreword ................................................................................................................................ 2
2 Background ............................................................................................................................. 4
    2.1 Costs are rising ........................................................................................................................... 4
        2.1.1 Healthcare costs are rising faster than inflation ............................................................. 4
        2.1.2 Costs for the health insurance industry are rising faster than overall health costs ........ 5
        2.1.3 Increased utilisation of hospital services ......................................................................... 6
        2.1.4 Increased costs of prostheses .......................................................................................... 7
        2.1.5 State governments are shifting costs to the privately insured ........................................ 7
    2.2 Participation is declining ............................................................................................................ 8
        2.2.1 Participants are facing higher costs................................................................................. 8
        2.2.2 Participation is declining, particularly for younger Australians ....................................... 9
    2.3 Current government support for private health insurance ...................................................... 10
    2.4 A Plethora of reviews show what’s needed ............................................................................. 11
3 Supporting private health insurance is cost effective .............................................................. 13
    3.1 Options to increase support ..................................................................................................... 13
        3.1.1 Restore the rebate ......................................................................................................... 13
        3.1.2 Increase the rebate for people under 40........................................................................ 14
        3.1.3 Fringe benefits tax ......................................................................................................... 14
        3.1.4 Increase the Medicare Levy Surcharge .......................................................................... 14
4 Reduce the costs of inefficient care........................................................................................ 16
    4.1 Contain the Prostheses list ....................................................................................................... 16
    4.2 Stop cost shifting...................................................................................................................... 17
    4.3 Stop the waste ......................................................................................................................... 18
5 Unlock the potential of the industry to improve care across the continuum ............................ 19
    5.1 Reduce Burden of treatment .................................................................................................... 19
    5.2 Complex and chronic care is now the norm ............................................................................. 19
    5.3 Regulatory barriers are preventing better patient care........................................................... 20
        5.3.1 Mental health ................................................................................................................ 20
        5.3.2 Out of hospital care ....................................................................................................... 21
        5.3.3 Rehabilitation and Second tier default benefits ............................................................ 21
    5.4 Transparency needs to be improved ........................................................................................ 22
6 The costs of inaction are high ................................................................................................ 23
    6.1 Private health insurance helps maintain the public system..................................................... 23
    6.2 Private health insurance provides choice................................................................................. 24
7 Conclusion ............................................................................................................................ 25

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            Private Healthcare Australia Budget Submission 2020
2 Background
Key points:

     •    The cost of healthcare is rising faster than inflation.
     •    The costs of private health insurance are rising faster than overall health costs.
     •    Over half of the Australian population (13.5 million people) choose to be covered by private
          health insurance.
     •    Younger, healthier people are dropping cover, while older Australians are maintaining their
          cover.

Australian governments, health providers and health funds work together with the shared purpose
of maintaining one of the world’s most innovative and successful health systems. Our healthcare
system delivers universal access, patient choice, and excellent health outcomes at reasonable cost,
drawing on a balance of public funding and patient contributions.

This common purpose is pursued most determinedly when the health system is under stress. In the
1990s, for example, participation in private health insurance fell to almost 30 percent, leading to
long public waiting lists and greater public health spend at the risk of other essential public services.
Well-designed incentives restored participation levels to ~50 percent, reversing these negative
impacts.

Some of the same trends that were apparent in the 1990s are re-emerging, threatening the balance
of Australia’s health system.

2.1 COSTS ARE RISING

2.1.1 Healthcare costs are rising faster than inflation
Like other developed countries, Australia is seeing its healthcare costs rise well above the consumer
price index and wages. Healthcare is increasing its share of both government spending and
consumer spending.

In the decade to 2017-18, Australia’s total healthcare expenditure (that is, recurrent and capital
expenditure combined) grew at just under 4 percent per annum, compared to an increase in CPI of
2.6 percent per annum. In 2017–18, an estimated $185.4 billion was spent on health goods and
services in Australia. Health spending has now reached 10 percent of gross domestic product. 1

Real growth in Australian Government spending averaged 3.4% per year in the decade to 2017–18.
Growth in government spending on health was lower in 2017-18 than the long term average, due
partly to a decrease in spending on private health insurance premium rebates (–1.9%). 2

1
    Australian Institute of Health and Welfare 2019. Health Expenditure Australia 2017-18. Health and welfare expenditure
    series no.65. Cat. no. HWE 77. Canberra: AIHW.
2
    Australian Institute of Health and Welfare 2019. Health Expenditure Australia 2017-18. Health and welfare expenditure
    series no.65. Cat. no. HWE 77. Canberra: AIHW.

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           Private Healthcare Australia Budget Submission 2020
Health care costs and GDP
                              Average annual increase over the decade 2007-08 to 2017-18
               4.5
                 4
               3.5
                 3
               2.5
                 2
               1.5
                 1
               0.5
                 0
                              Gross domestic product                          Health care costs

The drivers of the rising cost of healthcare include demographic factors such as our ageing
population and the increasing prevalence of chronic disease. Health system factors include a shift
from outpatient to inpatient settings, where more doctors are available and more treatments are
offered; more investigations of presenting symptoms due to the availability of more diagnostic tools;
and a fee-for-service system. 3

Much of this rising healthcare spend is an expression of consumer and national choice. It reflects our
national wealth, good health as a personal and national priority, the desire to sustain both personal
and national productivity, and an investment to reduce future healthcare costs. It also reflects that
previous life-limiting illnesses are now treatable, and so life expectancy is improving.

Nonetheless, both public and private systems should always be seeking to achieve the same or
better outcomes for lower costs where possible, with the savings returned in reduced taxes or
premiums, or re-invested in other areas of care.

2.1.2 Costs for the health insurance industry are rising faster than overall
      health costs
Private system costs are subject to the same underlying drivers as the public healthcare system, but
costs for private healthcare are growing faster than the overall costs of healthcare, with an average
annual growth rate of 5.4% per year from 2007–08 to 2017–18. 4

This has resulted in a significant increase in the proportion of Australian health spending covered by
private health insurance, from 7.4% in 2011–12 to 9.0% in 2017–18.5

3
    For example: The Productivity Commission (2017), Shifting the Dial: 5 Year Productivity Review; Australian Institute of
    Health and Welfare, 25 years of health expenditure in Australia: 1989-1990 to 2013-2014
4
    Australian Institute of Health and Welfare 2019. Health Expenditure Australia 2017-18. Health and welfare expenditure
    series no.65. Cat. no. HWE 77. Canberra: AIHW.
5
    Australian Institute of Health and Welfare 2019. Health Expenditure Australia 2017-18. Health and welfare expenditure
    series no.65. Cat. no. HWE 77. Canberra: AIHW.

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           Private Healthcare Australia Budget Submission 2020
Health costs
                           Average annual increase over the decade 2007-08 to 2017-18
              6

              5

              4

              3

              2

              1

              0
                  Private health insurance costs        Governments               Individuals
                                                   (Commonwealth and states)

Each member is claiming more services (that is, higher ‘utilisation’ of services), and the cost of
services is rising. In the five years to 2019, the number of hospital episodes grew at 2.4 percent per
member per year. The number of other treatments grew at 2.2 percent per member per year. 6

The overall rise in benefit payments is occurring despite more members taking up lower levels of
insurance cover and choosing higher excesses. This means the average policyholder is now covered
for fewer treatments or hospital episodes and/or must pay higher excesses to access them. While
these policies mean insurers are paying less of the cost of a health service, the consumer is paying
more. These ‘out-of-pocket’ expenses are having as much of an impact on consumer decisions on
private health insurance as the premiums.

2.1.3 Increased utilisation of hospital services
There are two key factors driving an increase in hospital services for people with private health
insurance – demographic factors and increased rates of hospitalisation. Some of this hospitalisation
is inappropriate, driven by perverse incentives.

The first reason more hospital episodes are being claimed by private health participants is on
average those participants are becoming older, and are more likely to have higher healthcare needs.
This is driving increased utilisation in the healthcare system.

Second, utilisation is rising significantly for the same age cohort. For example, utilisation per
member in the 85–89 age group rose by 16 percent in the five years to 2019, and there was a
3 percent increase in the 0–55 year age groups in the same period. 7

Further, perverse incentives are causing a shift from outpatient to inpatient care. Rehabilitation is an
example where the incentives promote inappropriate inpatient care where community-based
rehabilitation is demonstrated to be more effective.

6
    APRA Health Insurance Statistics, www.apra.gov.au (accessed December 2019)
7
    APRA Health Insurance Statistics, www.apra.gov.au (accessed between May-September 2018)

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           Private Healthcare Australia Budget Submission 2020
2.1.4 Increased costs of prostheses
The Australian Government’s deal with the Medical Technology Association of Australia (the MTAA
agreement) has failed to deliver the expected savings. Through a massive increase in the volume of
items subsidised through the Prostheses List – many of which are consumable items such as sponges
and glues – the savings from the price cuts have been undermined.

Instead of savings, there has been a $23.9 million increase in prostheses benefit payments in the
year to September 2019. This growth has been driven by a 169,382 increase in items in the “General
Miscellaneous” prostheses category (9% benefits increase with a 18.4% increase in utilisation in the
year to September 2019). 8

The growth in volume is illustrated below.

2.1.5 State governments are shifting costs to the privately insured
In 2017-18, public hospitals attracted $1.25 billion in revenue from private health insurance. There
has been an 87% increase from this source of funding since 2010-11. In contrast, state and territory’s
funding contribution and the Commonwealth contributions to public hospitals have each increased
by 47% over this period. 9

This increase in state and territory hospital expenditure puts upward pressure on private health
insurance premiums for families. Federal government expenditure through the Medicare Benefits
Schedule also increases.

Many public hospitals have an active program to drive private health insurance use to increase
revenue, particularly targeting patients presenting to Emergency Departments. This may include
designated staff, revenue targets, or inappropriately pressuring vulnerable patients and families with

8
    APRA Health Insurance Statistics, www.apra.gov.au (accessed November 2019)
9
    Australian Institute of Health and Welfare 2019. Health Expenditure Australia 2017-18. Health and welfare expenditure
     series no.65. Cat. no. HWE 77. Canberra: AIHW.

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            Private Healthcare Australia Budget Submission 2020
a strong suggestion that they should use their private health insurance. This happens despite the
National Health Reform Agreement stating, “hospital employees will not direct patients or their legal
guardians towards a particular choice.” (cl G18).

                           Index of source of funds for public hospitals
     200
     180
     160
     140
     120
     100
      80
      60
      40
      20
       0
             2010-11     2011-12     2012-13       2013-14      2014-15      2015-16       2016-17       2017-18

                Australian Government          State and territory governments         Private health insurance

In some instances, the benefits of private health insurance (such as choice of doctor) are not
exercised – in emergency departments for example, choice of doctor is impractical.

There are also reports of staff asking about private health insurance before seeking information
about a patient’s medical condition; and/or not making it clear that all Australians have the right to
free care in a public hospital.

Asking a patient about their private health insurance coverage in an emergency department prior to
being admitted may be contrary to clause G18 of the National Health Reform Agreement, which
states, “An eligible patient presenting at a public hospital emergency department will be treated as a
public patient, before any clinical decision to admit.”

2.2 PARTICIPATION IS DECLINING

2.2.1 Participants are facing higher costs
Joining, lapsing or downgrading private health insurance is driven primarily by financial
considerations. Consumers weigh the benefits of private health against the value of the public
system, as well as other goods or services they could spend their money on.

The affordability of healthcare has been reduced by years of rising premiums, increasing (and
unexpected) out-of-pocket costs and the decline in the government rebate. As well, slow wage
growth and increasing housing, energy, fuel and education costs have added to the pressure. 10

      •    The average premium rise for each level of hospital cover has increased more than wages
           over each of the last five years.
      •    Rebate adjustments have increased effective premiums by an additional 1 percent per year.
           In 2012, the government introduced means-testing and an adjustment factor to limit its total

10
     ABS Household Expenditure Survey, 2015–2016

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           Private Healthcare Australia Budget Submission 2020
spend on PHI rebates. As a result, the average effective premium payable by consumers has
            risen even faster than the nominal premium rate.
       •    Out-of-pocket expenses are rising, and lack transparency. Though out-of-pocket costs are a
            long-standing issue for PHI members, the number who cite medical out-of-pocket costs as a
            reason to drop out of PHI has more than tripled over the past five years, now reaching a
            third of participants.

While a record number of services are now covered under ‘no’ or ‘known’ gap arrangements (97% in
the September 2019 quarter), members must pay out-of-pocket costs for one in ten medical
services. Patients may incur multiple out-of-pocket costs for the same procedure, since the surgeon,
assistant surgeon and anaesthetist each bill the patient separately.

Consumer research shows that it is the lack of transparency rather than the costs themselves that
tempts them to downgrade or lapse their cover. Of a sample of consumers who had recently paid
out-of-pocket costs, 29 percent had negative feelings for their insurer when they were made aware
of all costs in advance. However, that proportion jumped to 61 percent for the one-third of
                                                                 11
consumers who were unaware the costs were coming.

The decline in affordability of private healthcare comes at a time that government has been
investing a significant amount of capital in public hospital system infrastructure. While such
investment is unlikely to be sustainable in the long run, it has created an additional incentive for
consumers to either remain in the public system or lapse their private cover.

An increasing number of Australians are finding it difficult to join or keep their private health
membership. Fifty seven percent of Australians without private health insurance cite lack of
affordability as the main reason they do not have it. More than a third of insured Australians are
finding they cannot comfortably afford it, with 8 percent (representing 400,000 people) having ‘real
                    12
difficulty’ paying.

2.2.2 Participation is declining, particularly for younger Australians
These concerns are reflected in recent declines in both PHI membership and a downgrading of cover.

■ Overall participation is declining. In the five years to 2019, the proportion of the Australian
       population with PHI hospital cover has declined from 47 percent to 44.1 percent. 13
■ Downgrading is increasing. Rather than drop their cover completely, many members are
       choosing a lower tier of cover, and pay more excess. For example, one fund reports that its
       lowest-tier hospital cover now covers more than a third of all members, up by 50 percent in just
       five years.
■ Fewer Australians in their 20s are taking up PHI. Historically, young adults have dropped their
       membership when they are no longer eligible for their family policy, and then returned to PHI by
       the end of their 20s. However, over the past 5 years the proportion of 25–29-year-olds with PHI
       cover has fallen by 8 percent.

11
     IPSOS, Consumer Research, July-August 2018
12
     IPSOS, Consumer Research, July-August 2018
13
     APRA Health Insurance Statistics, www.apra.gov.au (September 2019)

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             Private Healthcare Australia Budget Submission 2020
2.3 CURRENT GOVERNMENT SUPPORT FOR PRIVATE HEALTH INSURANCE
The Australian Government has three key mechanisms to support private health insurance:

      •    The Medicare Levy Surcharge is a 1–1.5 percent surcharge payable by consumers who earn
           taxable income above $90,000 and who do not take out private health insurance with
           hospital cover. The impact of the surcharge is significant: PHI participation in the $70,000 to
           $90,000 income bracket is 71 percent, and rises to 90 percent in the $90,000 to $105,000
                     14
           bracket.
      •    The premium rebate reduces the amount payable by those with PHI by a percentage of their
           premium, with the rebate determined by the insured’s age and, from 2012, their income.
           The rebate entitlement has been reduced from ~30 percent in 2012 to less than 25 percent
           now for most members.
      •    Lifetime health cover loading adds 2 percent to lifetime private health insurance premiums
           for every year after the age of 30 that a person chooses not to take out membership. This
                                                                       15
           incentive was very successful when introduced, but is now becoming less effective.

These three incentives are efficient, equitable and cost-effective policies to maintain private health
insurance participation at sustainable levels, and so reduce costs for the public system.

Each dollar of rebate spent draws in between $1.60 and $2.40 additional funding from the insured
                                      16
consumer for their healthcare. If that consumer were not insured, the public cost of their public
healthcare would be higher than the incentive paid, with each dollar of Commonwealth spending on
public hospitals being matched by $1.22 in state government spending. (In addition, there are
economic benefits of early treatment through the private system.) For this reason, a redirection of
public expenditure from the incentive to the public system will reduce the efficiency of total
government spend.

The value of the private health insurance rebate has been significantly reduced since its introduction
as a 30% rebate on health fund premiums for all members introduced in 1998.

In recent years there have been multiple variations to the regulations governing the rebate aimed at
controlling government outlays in this area. These include:

      •    means-testing introduced in the 2009-10 Budget;
      •    indexation to CPI, uncoupling the rebate from premium increases legislated in 2012;
      •    removal of the rebate from Lifetime Health Cover loadings, announced in 2009-10 Budget;
           and
      •    freezing of the income thresholds for rebate eligibility and the Medicare Level Surcharge at
           2014-15 levels through 2017-18.

The net effect of these measures is to slow the growth of private health insurance rebate outlays.
The cost of the rebate has been declining in both real terms and as a proportion of Australian
Government health expenditure. Over the ten years to 2017-18, Australian Government health
spending on its own programs has increased by an average of 4.0 percent per annum, spending on

14
     Analysis based on ATO Income Distribution Statistics, FY2015–16
15
     Comparison of 30–34 age group raw participation numbers between September 1999 and September 2000, based on
     APRA Statistics, Membership and Trends (2018)
16
     Range reflects fact that some members receiving the rebate would without the rebate also consider entering into
     private health

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            Private Healthcare Australia Budget Submission 2020
state grants have increased by 4.1 percent per annum, while spending on the private health
                                                                                    17
insurance rebate has only increased by an average 2.7% per annum.

                                 Australian Government health costs
                       Average annual increase over the decade 2007-08 to 2017-18
           4.5
             4
           3.5
             3
           2.5
             2
           1.5
             1
           0.5
             0
                  Own program expenditure      State government grants     Private health insurance
                                                                                    rebate

2.4 A PLETHORA OF REVIEWS SHOW WHAT’S NEEDED
Over recent years, there have been several reviews and investigations into health care and private
health insurance in particular. Some of the major reviews over the last five years include:

       •    Ministerial Advisory Committee on Out-of-pocket Costs (Department of Health 2018) 18
       •    Shifting the Dial: 5 year productivity review (Productivity Commission 2017) 19
       •    Private Health Ministerial Advisory Committee (Department of Health 2016-18) 20
       •    Private Health Insurance Consultations (Department of Health 2015-16)
       •    Better Outcomes for People with Chronic and Complex Conditions (Primary Health Care
                                     21
            Advisory Group 2015)
       •    Efficiency in Health (Productivity Commission 2015) 22
       •    Senate inquiry into value and affordability of private health insurance and out-of-pocket
                                   23
            medical costs (2014)

17
     Australian Institute of Health and Welfare 2019. Health Expenditure Australia 2017-18. Health and welfare expenditure
     series no.65. Cat. no. HWE 77. Canberra: AIHW.
18
     Department of Health 2018. Ministerial Advisory Committee on Out-of-pocket Costs: Report. Available at
     https://www1.health.gov.au/internet/main/publishing.nsf/Content/min-advisory-comm-out-of-pocket.
19
     Productivity Commission 2017. Shifting the Dial: 5 Year Productivity Review, Report no. 84. Australian Government:
     Canberra.
20
     There was no report from this group, but meeting outcomes are available at
     https://www1.health.gov.au/internet/main/publishing.nsf/Content/phmac.
21
     Primary Health Care Advisory Group 2015. Better Outcomes for People with Chronic and Complex Health Conditions.
     Australian Government: Canberra.
22
     Productivity Commission 2015. Efficiency in Health. Research Paper. Australian Government: Canberra.
23
     Senate Community Affairs Reference Committee 2014. Out of Pocket Costs In Australian Healthcare. Commonwealth of
     Australia: Canberra.

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            Private Healthcare Australia Budget Submission 2020
Reviews have generally called for private health insurance regulation to be lessened, 24 25 26 27
reducing perverse incentives, 28 29 better integration between public and private care, hospital and
community care, 30 31 32 greater transparency 33 34 and greater investment in prevention and primary
care. 35 36 37

The government has all the data and review material it needs for further reform of the private
health sector, now is the time for action.

24
     Productivity Commission 2017. Shifting the Dial: 5 Year Productivity Review, Report no. 84. Australian Government,
     Canberra.
25
     National Commission of Audit 2014. Towards Responsible Government: the Report of the National Commission of Audit,
     Phase One. NCOA: Canberra.
26
     Primary Health Care Advisory Group 2015. Better Outcomes for People with Chronic and Complex Health Conditions.
     Australian Government: Canberra.
27
     Productivity Commission 2015. Efficiency in Health. Research Paper. Australian Government: Canberra.
28
     Productivity Commission 2017. Shifting the Dial: 5 Year Productivity Review, Report no. 84. Australian Government,
     Canberra.
29
     Paolucci, F and M García-Goñi (2015). The Case for Change Towards Universal and Sustainable National Health Insurance
     & Financing for Australia: Enabling the Transition to a Chronic Condition Focussed Health Care System, Australian Health
     Policy Collaboration Technical paper No. 2015-07. Melbourne: Australian Health Policy Collaboration.
30
     Productivity Commission 2017. Shifting the Dial: 5 Year Productivity Review, Report no. 84. Australian Government,
     Canberra.
31
     Paolucci, F and M García-Goñi (2015). The Case for Change Towards Universal and Sustainable National Health Insurance
     & Financing for Australia: Enabling the Transition to a Chronic Condition Focussed Health Care System, Australian Health
     Policy Collaboration Technical paper No. 2015-07. Melbourne: Australian Health Policy Collaboration.
32
     Primary Health Care Advisory Group 2015. Better Outcomes for People with Chronic and Complex Health Conditions.
     Australian Government: Canberra.
33
     Department of Health 2018. Ministerial Advisory Committee on Out-of-pocket Costs: Report. Available at
     https://www1.health.gov.au/internet/main/publishing.nsf/Content/min-advisory-comm-out-of-pocket.
34
     Senate Community Affairs Reference Committee 2014. Out of Pocket Costs In Australian Healthcare. Commonwealth of
     Australia: Canberra.
35
     Productivity Commission 2017. Shifting the Dial: 5 Year Productivity Review, Report no. 84. Australian Government,
     Canberra.
36
     Paolucci, F and M García-Goñi (2015). The Case for Change Towards Universal and Sustainable National Health Insurance
     & Financing for Australia: Enabling the Transition to a Chronic Condition Focussed Health Care System, Australian Health
     Policy Collaboration Technical paper No. 2015-07. Melbourne: Australian Health Policy Collaboration.
37
     Productivity Commission 2015. Efficiency in Health. Research Paper. Australian Government: Canberra.

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             Private Healthcare Australia Budget Submission 2020
3 Supporting private health insurance is cost
  effective
Key points

    •   Australian Government subsidies for private health insurance are cost effective
    •   Options to increase support include:
           o Restoring the rebate to 30%
           o Increase the rebate for younger Australians
           o Introduce a fringe benefits tax exemption
           o Increase the Medicare Surcharge Levy

Supporting private health insurance reduces pressure on the Australian Government’s Budget by
reducing pressure on public hospitals.

Put simply, increasing demand in public hospitals costs the Australian Government 45 cents in the
dollar, through fixed rates of increase in the National Health Reform Agreement. Subsidising that
demand through supporting private health insurance costs the Australian Government much less –
around 25 cents in the dollar for the private health insurance rebate.

Subsidising private health insurance is the cheapest and most effective way for the Australian
Government to manage the increasing demand for hospital care.

3.1 OPTIONS TO INCREASE SUPPORT
Private Healthcare Australia released a paper in October 2019 outlining a range of options for
supporting private health insurance for Australians under 40, Levers to Increase Young Adult
Participation in Private Health Insurance.

One of the key drivers of reduced private health insurance participation among young people has
been increases in premium cost, alongside reduction of the effective rebate as a proportion of
premium and increased cost of living pressures. Due to the community rating system, younger
participants must pay similar premiums to older participants despite being substantially less likely to
require hospital services. Community rating drives a cross-subsidy of approximately $900 from
people aged under 50, to those over 50 and this amount is increasing.

3.1.1 Restore the rebate
Independent economic research commissioned by PHA has consistently found the rebate is an
efficient way to fund planned surgery. To address the declining effective rebate, we recommend that
the government restores the rebate to 30% of the premium for low and middle-income earners in
the first instance.

As a first step, restoring the 30% rebate for 18-39 year-old participants is estimated to incur a direct
cost to the Commonwealth of approximately $418m per annum in 20245 , but after savings from
reduced need for public hospital funding is considered the net impact would be -$261m. Full details
of the modelling are available in Levers to Increase Young Adult Participation in Private Health
Insurance.

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         Private Healthcare Australia Budget Submission 2020
3.1.2 Increase the rebate for people under 40
Levers to Increase Young Adult Participation in Private Health Insurance modelled an increase in the
private health insurance rebate to 40% under the age of 40. The option of increasing the base rebate
to 40% for younger participants should be considered as an opportunity to clearly signal the
importance of young adult participation in the private health insurance system. While restoring the
rebate would help return private health insurance participation among young people to its previous
levels, increasing the rebate would increase the likelihood of generating a significant step-change in
uptake of private health insurance in this age group.

Increasing the total base rebate amount for younger participants to 40% is estimated to incur a
direct cost to the Commonwealth of approximately $1.1bn in 2024, but the net impact is -$0.9bn
once cost shifting from the public hospital system is accounted for. Full details of the modelling are
available in Levers to Increase Young Adult Participation in Private Health Insurance.

3.1.3 Fringe benefits tax
Levers to Increase Young Adult Participation in Private Health Insurance recommended a Fringe
Benefits Tax exemption for participating employees under the age of 40. Inclusion of private health
insurance premiums as an exemption from fringe benefit taxes, allowing employers to provide
private health insurance as a fringe benefit and thereby reduce the taxable income of the employee,
effectively delivers a discount on private health insurance for the employee. It is assumed
employees will be able to opt in or opt out from this option.

With the assumptions modelled in the report, a participation increase of 1.5% points could be
expected by 2024 among young people from implementation of this policy, relative to the
momentum case.

Based on an assumption that 30% of employers are participating in the program and that the
exemption is only applicable to taxpayers between the ages of 18-39, implementation of a Fringe
Benefits Tax exemption would have a net impact to the Commonwealth of -$584m on an annual
basis in 2024. Full details of the modelling are available in Levers to Increase Young Adult
Participation in Private Health Insurance.

3.1.4 Increase the Medicare Levy Surcharge
Despite the existing Medicare Levy Surcharge, almost 200,000 high income Australians are not
covered by private health insurance. 38

It is important in this to recognise that the Medicare Levy Surcharge is not a tax subsidy even
though, as a penalty, it is expressed as incremental taxation. The purpose of the surcharge is to
encourage private health insurance membership, rather than to raise taxation, so the preferred
Treasury income from this measure is zero.

That said, from the economic perspective of a consumer, the Medicare Levy Surcharge can be
modelled as a reduction in the perceived price of private health insurance. Thus an increase in the
surcharge may increase the likelihood of a person holding insurance, and may also increase the
attractiveness of a higher tier product.

Private Healthcare Australia has commissioned modelling on the effects of an increase in the
Medicare Levy Surcharge. Changes to the Medicare Levy Surcharge have been undertaken

38
     Australian Taxation Office supplied figures for 2016-17.

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             Private Healthcare Australia Budget Submission 2020
previously, when higher penalty contributions were introduced for those on higher incomes, ranging
from the original 1% levy to new rates of 1.25% or 1.5% depending on income level.

These changes were not without some controversy but, at the same time, align strongly with many
other government initiatives, payments and taxes which are means-tested. This alignment allows
changes to the surcharge to be argued in a manner consistent with broader government approaches
and is generally well accepted by the Australian public who perceive means testing as both reflective
of the application of equity and justice.

Private Healthcare Australia recommends an increase in the Medicare Levy Surcharge of 100 basis
points.

Our modelling suggests that this would result in increased private health insurance revenue of
$435 million; a rebate cost increase of $41 million, and an increased Medicare Levy Surcharge
penalty of $206 million. The nett revenue to government would be approximately $164 million per
annum.

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        Private Healthcare Australia Budget Submission 2020
4 Reduce the costs of inefficient care
Key points

        •    Healthcare costs generally rise faster than inflation
        •    Private health insurance is more vulnerable to health inflation due to regulatory and
             structural issues
        •    Reducing the costs of private healthcare reduces the Australian Government contribution to
             the rebate

Australia’s healthcare costs will tend to rise due to our ageing population, rising chronic disease and
complex multimorbidity, and higher expectations for care quality. However, structural
characteristics of our system affect health inflation, including the cost of prostheses, cost-shifting,
wasteful spending and inefficient pricing. The result is healthcare inflation that is consistently higher
than CPI and wage growth, with a corresponding upward pressure on private health insurance
premiums.

The key areas of private healthcare expenditure are private hospital costs, medical fees, primary
care fees (for general treatment which covers dental and other allied health in the community) and
public hospitals. The areas of costs growing most rapidly include prostheses and state government
charging for private patients in public hospitals, as outlined previously.

While reform in these areas are often independent of the Australian Government budget process,
policy changes affecting the cost of private health insurance does have budget implications due to
the rebate.

For example, simply reducing the prices paid under the Prostheses List for 6,000 drug-eluting stents
used in Australia from one company alone to the same price paid in New Zealand would save the
Australian Government over $2 million each year.

4.1 CONTAIN THE PROSTHESES LIST
Prostheses (broadly defined as implantable medical devices used in surgery and procedural
medicine) in Australia are often overpriced, overused, and in many cases, there is little or no
evidence that there is a patient benefit.

Prostheses use is one of the fastest areas of private health fund expenditure growth over the last
decade. Current expenditure by health funds on prostheses is around $2 billion, meaning that the
Australian Government is subsidising prostheses (indirectly through the rebate) by around
$500 million per annum.

The Australian Government sets the price on over 11,000 individual items. The Grattan Institute has
described the Prostheses List as “redolent of Soviet-era central planning at its worst.” 39 In a recent
presentation Stephen Duckett noted,

             The current prosthesis pricing approach incorporates all the wrong incentives, creates
             arbitrage opportunities, encourages rent seeking, and leads to poor outcomes for patients,
             health insurance members and taxpayers. It does nothing to improve efficiency. It is, in short,
             a protection racket. 40

39
     Grattan Institute 2019, https://grattan.edu.au/wp-content/uploads/2019/08/Prostheses-speech-final-updated.pdf
40
     Ibid.

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Other significant areas of government health expenditure like the Pharmaceutical Benefits Scheme
(PBS) include price disclosure, health technology assessments, group premiums, reference pricing,
brand premiums and linking reimbursement to use only for clinically-approved indications. The
Prostheses List process generally lacks this spending discipline.

The waste is significant and harmful. Estimates vary widely, but savings from greater spending
discipline are likely to save $250-400 million per annum without affecting patient care. The
Commonwealth would reap approximately a quarter of those savings through the rebate, with the
rest distributed among Australian families paying premiums.

Private Healthcare Australia (PHA) notes the Australian Government is undertaking reviews across
many areas of the Prostheses List, including the general and miscellaneous category. Despite the
efforts of the Government, progress has been slow.

A greater investment is needed into bringing standard discipline and restraint to the Prostheses List
prior to the expiry of the MTAA Agreement in 2022. Further, an investment in better policy options
for post-2022 are required now, to assess the public benefit of different reform options and reduce
the current wastage.

PHA has previously recommended that the Commonwealth establish a national independent body to
manage the procurement of prostheses (including the implementation of international reference
pricing). While still favouring a body such as the Independent Hospitals Pricing Authority taking this
role and developing an efficient price for prostheses used in public and private hospitals, the rorts
within the system currently are seeing many in the sector favouring complete deregulation following
the expiry of the MTAA Agreement with the Australian Government.

4.2 STOP COST SHIFTING
The Commonwealth Government is overpaying for public hospital services, as many state and
territory governments are inappropriately targeting people to use their private health insurance in
public hospitals.

Regulations permitting State Government cost shifting, that is charging private patients twice when
they use the Medicare system, need to be tightened up. This shifts over $1.25 billion every year
directly on to premiums (and the Commonwealth Government rebate), and also increases costs of
the Medicare Benefits Schedule.

There will always be some private patients needing treatment in a public hospital, however the
practice of chasing patients to use their health insurance is not always in the best interests of the
consumer or the health system.

Private Healthcare Australia recommends that the Australian Government:

    •   Clarify that patients may not be approached in emergency departments to determine if they
        have private health insurance
    •   Disallow states and territories nominating patients as private if they enter the hospital
        through an emergency department
    •   Ensure visiting medical officers are physically present if their provider number is used for
        services provided in a public hospital
    •   Ensure no private patient is admitted to a public hospital through the ED unless they have
        been assessed by a fully-trained specialist in the relevant treatment area ie not the ED
        physician or a junior doctor
    •   Enforce a standard patient election form which outlines all the pros and cons of electing to
        be a private patient in a public hospital, and

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         Private Healthcare Australia Budget Submission 2020
•    Consider a reference to the Australian Competition and Consumer Commission to examine
            the tactics used by state and territory governments to determine if it is misleading and
            deceptive conduct.

4.3 STOP THE WASTE
The Productivity Commission estimates that 10 percent of healthcare spending either has no effect,
causes harm or is not worth its cost, 41 noting that ‘unjustified clinical variations, including the use of
practices and medicines contraindicated by evidence remain excessive, an indicator of inadequate
diffusion of best practice, insufficient accountability by practitioners, and a permissive funding
system that pays for low value services. 42

Low value care is defined as care that either has no effect, causes harm, or is not worth its cost. The
global ‘Choosing Wisely’ initiative is an academic collaboration, which identifies unnecessary or
harmful medical procedures and tests. PHA has commissioned from the University of Sydney a
detailed analysis of low-value procedures still occurring and being funded by the Medicare Benefits
Schedule (MBS) and private health insurance. 43 Examples of low value procedures that could be
removed from the MBS are arthroscopic surgery for knee osteoarthritis and back x-rays, saving
approximately $90 million per year. The Atlases of Health Variation researched and published by the
Australian Commission for Safety and Quality in Healthcare provide an indication of where low-value
                                   44
or even harmful care is occurring.

PHA supports the MBS Review to prevent outdated and wasteful clinical care. Health funds are
committed to ensuring members are able to access quality clinical care when and where they need
it. However, increasing pressure is being placed on the system by having to fund what may no longer
be appropriate or necessary and potentially diverting resources from areas of need.

The MBS Review has already had a number of successes, and as expected, some implementation
issues. PHA will continue to work with the Australian Government to identify wasteful practices such
as patients admitted to hospital unnecessarily for eye injections and other minor procedures,
inappropriate and unnecessary screening and inappropriate hospitalisation for rehabilitation.

41
      The Productivity Commission (2017), Shifting the Dial: 5 Year Productivity Review.
42
      The Productivity Commission (2017), Shifting the Dial: 5 Year Productivity Review.
43
 Prof Adam Elshaug, Kelsey Chalmers and Tim Badgery-Parker (2018) Measuring low-value services in Medibank, Bupa,
GMHBA and HCF data:2015/16 to 2016/17. Sustainable Health System Solutions.

44
     The Third Australian Atlas of Healthcare Variation, ACSQHC, December 11, 2018.

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             Private Healthcare Australia Budget Submission 2020
5 Unlock the potential of the industry to improve
  care across the continuum
Key points

       •    Australia’s health system does not promote least disruptive care
       •    We need to balance burden of disease and burden of care
       •    Regulatory and financing barriers need to be addressed

Australia’s health system is built on a regulatory and funding structure which encourages
hospitalisation, encourages inappropriate servicing, over-servicing and over-diagnosis. The simple
fact is that a fee-for-service system means that a service must be provided in order to secure a fee.
In addition, our system is siloed, fragmented and is not well focused on what is important to the
community.

The corollary is that our system discourages community-based care, discourages self-management,
fails to incentivise prevention, discourages collaboration, stifles innovation and creates barriers of
entry for new providers. Australia lags much of the developed world in utilising new technologies,
sharing information and providing tools for communities to manage their own care.

We need to ensure our health system:

       •    provides people with the right type, quality and timing of care
       •    provides that care at the right price, and
       •    pays that price in the most efficient way.

Improving the regulatory environment in conjunction with the cultural environment will help
promote innovation and manage costs into the future, reducing the burden on the Australian
Government’s budget.

PHA would like to promote a discussion across the community on least disruptive care, and how the
Australian Government can unlock the potential of private health insurance to improve health care
across the continuum.

5.1 REDUCE BURDEN OF TREATMENT
We are cognisant of the burden of disease, but rarely pay attention to the burden of treatment.
Measuring the burden of treatment goes well beyond costs. The burden includes time, stress,
productivity, and the opportunity cost of each of these burdens.

The objective of health care should be an improved quality of life, not the eradication of disease.
This is particularly the case where our health system is dealing with a rapid rise of chronic disease
rather than just seeking to address acute conditions such as injury or infectious diseases. Millions of
Australians live with chronic health conditions – we need to address disease to help them manage
their lives, not put their lives on hold to manage their diseases.

5.2 COMPLEX AND CHRONIC CARE IS NOW THE NORM
                                                                                       45
Around one in two Australians lives with a chronic health condition. Many Australians live with
heart conditions, diabetes, arthritis, back pain and mental health conditions. Fewer people are dying

45
     Fetherston H, Calder R, Harris B. 2019. Australia’s Health Tracker. Mitchell Institute, Victoria University Melbourne.

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             Private Healthcare Australia Budget Submission 2020
from these conditions, meaning that more and more Australians are living longer with chronic health
issues. There has been a substantial increase in recent years in the number of people living with
multiple chronic health conditions, both as a result of population ageing and more younger people
having a chronic condition. Mental health conditions have been a substantial driver of comorbidity. 46

Australia’s health system is based on an acute care model, including our financing and regulatory
structures. The supply of health care, based on these outdates platforms, no longer matches the
community demand for health care.

The approach to helping people manage chronic conditions must be as holistic as possible, with both
medical treatment and behavioural elements. By their nature, chronic and complex diseases will
often require hospital treatments. They also require ancillary care that can be provided out-of-
hospital, and preventive action on contributing behaviours such as poor diet, low exercise, lack of
mediation compliance, alcohol consumption and smoking.

There is significant scope for healthcare providers, public and private funders, and the broader
community to work more closely on the prevention, early treatment, inpatient and out-of-hospital
care of these conditions. Both international and Australian research supports the case for holistic
care programs for people living with chronic or complex diseases, improving quality of life and
reducing the demand for hospital admissions.

5.3 REGULATORY BARRIERS ARE PREVENTING BETTER PATIENT CARE
The sheer volume of regulation in the private health insurance industry is staggering. In addition to
the Private Health Insurance Act 2007 (the Act), the industry is subject to several other primary Acts
and scores of legislative instruments. There are literally thousands of pages of law that affect the
business of private health insurance.

The Australian Government Guide to Regulation (2014) notes,

            The Government’s rigorous approach to policy making seeks to ensure that regulation is
            never adopted as the default solution, but rather introduced as a means of last resort. 47

Private health insurance regulation fails this ideal. More importantly, the existing regulation causes
harm, preventing private health insurance funds from unlocking the potential of improved health
promotion and prevention, modern and effective mental health care, promoting out of hospital care,
and innovative care options. This harms consumers and health funds, and costs the Australian
Government through increased private health insurance rebates.

5.3.1 Mental health
Mental health conditions are increasingly prevalent across the population, and cause immense
damage to individuals, their families and carers, the economy and the community.

To improve mental health care through private health insurance, it is imperative that regulatory
barriers that prohibit health funds from funding mental health care in the community be removed
and enable cost-effective community initiatives and care packages to be provided at scale.

Several funds are running trials and preparing to improve models of care for people living with
mental health conditions. Many of these programs show promise, but are limited by the Private

46
     Harris B, et al. 2018. Australia’s Mental and Physical Health Tracker: background paper. Australian Health Policy
     Collaboration, Mitchell Institute, Victoria University.
47
     Australian Government 2014. Australian Government Guide to Regulation. Available at
     https://www.pmc.gov.au/resource-centre/regulation/australian-government-guide-regulation.

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             Private Healthcare Australia Budget Submission 2020
Health Insurance Act 2007 (the Act), the Private Health Insurance (Complying Product) Rules 2015,
and the Private Health Insurance (Health Insurance Business) Rules 2018.

Both the Act and the Rules place strict definitions on the type of care that may be covered by private
health insurance. The definitions of hospital care and hospital-substitute treatment are out of date
and stifling innovation in mental health care. For example, the exclusion of general practice in
chronic disease management programs (cl. 12, the Business Rules) is contrary to accepted medical
practice in Australia.

Despite health funds currently being constrained by the legislative barriers, PHA is working with our
members on an outline of a framework to provide services to Australians living with mental health
conditions in the community. This work has the potential to be transformative and lead the way in
modernising private health care in Australia. This is an absolute priority for PHA and our member
funds. We will continue to work with the Minister for Health, the Hon. Greg Hunt MP, and across
government to address the regulatory barriers.

5.3.2 Out of hospital care
The Australian Government must address the legislative barriers that only allow health funds to pay
for hospital-substitute care, rather than out of hospital care across the continuum. The legislation in
many cases prescribes what must happen, rather than proscribe what may not happen. That leads to
some unintended results and significant fragmentation. For example, Paolucci and García-Goñi
describe, “a further and startling fragmentation in the Australian health care arrangements is the
exclusion of private health insurance from the capacity to purchase or pay for primary health care.” 48

Again, the legislation is out of date. AMA President Dr Tony Bartone, has noted, “Chronic disease is
not best managed in an acute hospital environment … Hospitals are a very expensive setting to
conduct ambulatory care.” 49 Many more insurers, health provider bodies and commentators are
calling for reform to allow more flexibility in out of hospital care.

5.3.3 Rehabilitation and Second tier default benefits
The Australian Government needs to do more than just allow insurers to fund more flexible out of
hospital options; it must address perverse incentives for inappropriate hospitalisation.

The two most urgent reforms to prevent inappropriate hospitalisation are to address the legislative
rules on rehabilitation and second tier default benefits.

There is growing evidence that the best outcomes from rehabilitation for a range of procedures is
done in home rather than in hospital. In Australia, financial incentives mean that in hospital
rehabilitation is increasing, rather than declining. This means that patients are getting lower quality
care at a higher price, putting pressure on private health insurance premiums.

PHA is working with the Minister for Health seeking a change in the definition of “rehabilitation
patient” in the Private Health Insurance (Benefit Requirements) Rules 2011 to make it clear that a
patient in hospital for rehabilitation must receive a minimum standard of care in line with the
Australasian Faculty of Rehabilitation Medicine Standards.

48
     Paolucci F, García-Goñi M. 2015. The Case for Change Towards Universal and Sustainable National Health Insurance &
     Financing for Australia: Enabling the Transition to a Chronic Condition Focussed Health Care System, Australian Health
     Policy Collaboration Technical paper No. 2015-07. Melbourne: Australian Health Policy Collaboration
49
     Dr Tony Bartone quoted in Robinson N. 2019, ‘Let private health funds cover all GP bills’ The Australian, 29 October
     2019.

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